1.2.1. Historically, investors in PPP bonds have been institutions with long term liabilities against which they needed to have assets to produce matching long term cash flows. The key players have been pension funds, life insur-ance companies, both of which invested directly, and fund management companies, whose clients are also pension funds and life insurance companies.
1.2.2. Over the last three to four years, banks running asset swap books have been the principal buyers of PPP bonds2. The economics behind the asset swap execution were driven by the ability of these investors to pur-chase index-linked bonds issued by PPP project companies and wrapped by monolines, and swap the cash flows to a fixed rate basis through an inflation swap. The fixed rate flows were then sold to an end investor who wanted to have fixed rate cash flows. This arbitrage produced a stream of future cash flows that could be recognised immediately as income on the books of the asset swapper, creating a profitable business and allowing these institutions to offer a lower price on the bonds than traditional "real money" investors that were able to recognise cash flows as income only when they received them over time. Although this devel-opment was beneficial to the public sector because debt funding costs were brought down, the unintended consequence was that from 2005 traditional investors were increasingly driven from the market by the lower pricing offered by the asset swappers. The simultaneous weakening of the monolines and the problems faced by the asset swappers in rolling over their short-term funding beginning in early 2008 brought this source of funding to an end.
1.2.3. Mostly recently, sovereign wealth funds and "alternative investment funds" have been mooted as potential PPP investors. These investors have been active in infrastructure markets for a number of years and the current interest rate environment has made PPP debt a potentially attractive option for them. To date, however, neither class of investor has made a significant mark on the PPP bond market, partially because of the existence of other debt investment opportunities, such as utilities, offering a safe return with substantially less up-front time and effort required from the investor, and partially because the public sector and private sector sponsors have not made an effort to bring these investors into the PPP transaction flow.
____________________________________________________________________________________
2) The dominant institutions in this market were Dexia and Depfa.